Major Debates Over Macroeconomic Policy

National economies are intrinsically unstable and if let to govern over self would ultimately suffer fluctuations leading to chaos and unprecedented social disorder. Economists play a pivotal role towards the provision of valuable insights concerning human behavior in a given market environment (Dellepiane‐Avellaneda, 2015). Such information is vital in enabling government’s policy formulators to determine on which macro-economic policies are fit to guarantee economic stability. This paper discusses tax incentive for saving and reducing federal government’s discretionary powers as the two significant but unresolved issues in contemporary macroeconomic debate.

Tax Incentives for Saving

A desirable macroeconomic goal for any economy is to realize higher levels of personal saving amongst citizens. According to Dynan (2013), less Americans are keen on saving part of their incomes. Economists provide that offering tax incentives enables people to save more. In the short term, as house hold embrace savings towards catering for future needs, then they spend little leading to narrower economic growth. However, in the longer term, higher personal savings ensure households are better position to venture into significant investments opportunities allowing for strong economic development. On the other hand, low income earners are most sensitive to changes in tax laws. If taxes on low income brackets are increased, then they have no money left to save after expenditures (Dynan, 2013). Among the rich, these tax incentives will benefit them greatly yet they do not require any form of motivations to save. The contemporary debate concerning the country’s macroeconomic policy have some opposing tax law changes to encourage saving while other are advocating for it towards empowering low income earners upon retirement.

Those against tax incentives to spur greater savings argue that such policy ought not to simply focus on encouraging savings. It should look to redistribute incomes by ensuring the tax burden falls on the wealthy since they are able to afford it (Dynan, 2013). Others provide that tax incentives result in minimal changes in saving tendencies. This is to the extent that there is negligible increase in saved amounts for future investments leading to non-desirable economic growth.

Proponents for tax incentives to encourage higher savings point out that low income earners form the largest proportion of Americans. Though the savings increase only marginally, the collective amounts are quite significant thus empowering the government to increase investments, economic output thereby increasing living standards (Dynan, 2013). People generally respond positively to incentives and if tax laws are made friendlier, then higher amounts of savings will be ensured. There are some tax regimes that overburden investors such as those imposed on corporate profits. Double taxation at the organizational level and at the investor level result in situations where there is not only lesser savings but also low amounts of funds for re-investment.

It is the opinion of this paper that tax laws should incentivize savings through policies that focus on greater empowerments for low income cadre citizens. For instance, have consumption taxation as opposed to income taxation can guarantee higher savings among the lower class therefore ensuring they have the capacity to become future investors. This will result in instances where the government opts to limit budget deficits by being more critical on undertaken investments thereby raising public savings.

Reducing Federal Government’s Discretionary Powers

Monetary policies implemented at the discretion of the federal government are considered problematic by advocates of the rule of law and regulatory standards that stipulate adherence to the policy rule. The first problem emanates from the possibility of incompetence amongst top fiscal system administrators (Tatom, 2014). It also allows for political manipulation that discredits aims to ensure senior office holders are nonpartisan and do not condone abuse of power. The second problem is associated with greater possibility of macro policy instabilities mainly due that unacceptable inflation rates. This is if policy makers execute actions at their own volition.

On the other hand, opponents of monetary policy made by rule believe that discretionary tactics allow for more flexibility. They also content that monetary policy can be employed against a particular political entity with an aim of boosting another’s chances (Tatom, 2014). Challengers allege that economic issues relative to abuse of office and discretion are generally hypothetical and that there is no clear significance concerning what is considered as the political business cycle. Given that the US as any other countries is affected by difficulties experienced by other large economies, rigid observance of the policy rule may render the economy unable to react appropriately to shield citizens from adverse effects (Tatom, 2014).

With regard to the debate on whether monetary policy ought to be effected by rule or not, this paper takes the position that it is best for the economy to subscribe to rule. This guaranteed that the federal government as well as Federal Reserve is steadfast in ascertaining temperate and secure growth in money supply (Tatom, 2014). This categorically limits instances of abuse of office, time inconsistency, and incompetence. Indeed, in periods of heightened political activity, it becomes increasingly possible for central bank leaders to align themselves with particular political entities. This is bound to result in unfavorable economic fluctuations relative to a country’s electoral calendar. Implementing monetary policy by rule also eliminates chances of inconsistency in attempts to arrest rising inflation.

In conclusion, this paper has provided that monetary policy rule are highly beneficial since they subscribe to morals, values, and ethical practices limiting abuse of office, time inconsistency, and incompetence amongst senior policy makers. It has also championed for tax incentives as a way to spur and cement a culture of saving among citizens. Empowering lower income earners to be future investors along with conforming to rule in policy formulation and implementation guarantees progressive longer term economic development.

References

Dellepiane‐Avellaneda, S. (2015). The political power of economic ideas: The case of ‘expansionary fiscal contractions’. The British Journal of Politics & International Relations, 17(3), 391-418.

Dynan, K. (2013). Better ways to promote saving through the tax system. Brookings. Retrieved from https://www.brookings.edu/research/better-ways-to-promote-saving-through-the-tax-system/

Tatom, J. A. (2014). US monetary policy in disarray. Journal of Financial Stability, 12, 47-58.