Reference no: EM13974014

Please read the following case and respond to the questions following the narrative:

Typical political rhetoric, both Republican and Democratic, asserts that cutting government spending will impose short-term pain in order to achieve long-term gain. Milton Friedman calls this "utter nonsense." He claims that cutting spending will almost surely involve immediate gain for the many, short-term pain for the few, and long-term gain for all.

He points to the elimination of price controls on butter in 1995. The price of butter dropped to half its previous level. Who gained? Millions of consumers and taxpayers who ceased paying for this program, thereby lowering the deficit. Who lost? Those dairymen who were subsidized and a few bureaucrats.

Another example is the Export-Import Bank. Few voters know it exists. This mammoth agency lends money on subsidized terms to facilitate exports, i.e., to substitute the judgment of bureaucrats for the judgment of the market. Who would gain if the agency were to be eliminated? Besides the taxpayers, the shareholders and employees of those firms not receiving the subsidy. Who would lose? The shareholders and employees of the subsidized firms and the bureaucrats in the agency. In the long run, the major gain would be the more efficient allocation of capital among industries, which would raise the nation's real income.

Source: Milton Friedman, "Budget Cutting: A Lot of Gain, Little Pain," The Wall Street Journal, May 15, 1995, p. A16.

Questions:

1. How would a liberal economist answer these ideas?

2. How would a conservative economist answer?

3. If cutting programs would help so many people, why doesn't Congress pass laws to do so?

4. If programs were cut, what would happen to the deficit?

5. What would happen to the debt

Please respond to the following:

1. What are the advantages and disadvantages to household debt? Are these the same advantages and disadvantages as government debt?

2. Explain the difference between countercyclical and procyclical policies. Provide an example of each.

3. What do you think about Ricardian equivalence? How did you respond when you learned that the government was going to have a $2 trillion deficit in 2009? Was your response consistent with Ricardian equivalence?

4. Suppose your friend says that he thinks the government should use functional finance. Does this mean your friend believes the free market will always keep the economy healthy?