Policy Debate - Stimulus vs. Austerity

There is a huge debate going on over macroeconomic policy across the world. The core of the debate is whether governments should continue deficit spending to stimulate economies to address the record high unemployment or if they should adopt austerity policies (reduce spending) to reduce debt, or at least control deficits. This debate is outlined in this week's leader in the Economist, which has already responded to by both DeLong and Krugman.

Instead of weighing in on the debate, I want to focus on how important this debate should be to teachers of economics.

For teachers, presenting this conflict is about getting students to understand that this is a debate that gets to the core divisions in macroeconomics between the Keynesian side and the Rational Expectations side of the argument over the ability of the economy to recover from economic problems without government action and the inflationary implications of policy (both fiscal and monetary). Students need to be taught that this intellectual debate really matters since the policy implications have serious implications for millions of people's lives. The intensity of the debate, and the lack of deference shown by either side, is an indication of how seriously both sides view the policy ramifications.

One of my goals in re-organizing my economics class is to frame the macroeconomics part of the course around this debate. Framing the macroeconomic section this way affects how I teach other parts of the class, such as the microeconomics section and injecting a unit on behavioral economics, to give the students the micro foundations to understand the macro debate. It is not a new debate - it has been raging in one form or another since the Great Depression and the rise of Keynesian economics. And, it was largely thought to have been resolved. That is until the current crisis, which has just reignited the conflict. There are two good articles that teachers can use to give a background to this debate and connect it to the current economic crisis. The first, and more accessible, is Paul Krugman's article "How did Economists get it so Wrong". The second, more advanced article is Gerg Mankiw's "The Macroeconomist at Scientist and Engineer".

With many world governments saying they will be enacting austerity measurements and the Congress refusing to pass an extension of unemployment benefits, this is a debate that is far from over, but at the front of economic policy.

Stay tuned.