Macroeconomics—Is It Still Helpful in an Age of Scarcity? - Economics and Ecology: United for a Sustainable World - page 107

the premise that capitalism innately tends to be somewhat unstable and is
always on the horns of a dilemma between unemployment and inflation.
Therefore, in their simplest forms, the control mechanisms of monetary and
fiscal policy are built around bolstering employment in the troughs, fighting
inflation at the peaks, and thus promoting overall stability of the economy.
Controlling the Economy
And how do we propose to do that? At the very outset, the policy tools recog-
nize that the government, beyond being the place where we collectively make
and enforce the agreed-upon rules for the society, is a significant demander
and supplier of goods and services in the economy—hence, the term public
sector . In other words, the government is recognized as an economic entity
with considerable power.
Right here, an astute reader can sense controversy. Many times, we have
all heard, from a conservative or libertarian mindset, that the role of gov-
ernment should be absolutely minimal. Its role should be to operate the
courts, enforce private contracts, and provide for national defense. The latter
is perhaps the only area (i.e., military hardware and personnel) in which
the government should legitimately be allowed to be a significant employer
or purchaser of goods and services. In its more extreme versions, such a
worldview implies little or no support for public education, social security,
Medicare, and certainly public welfare programs.
Therefore, just the thought of engaging in fiscal and monetary policy
invokes skepticism and outright ideological opposition, even before the
actual fact of implementing specific measures emerges from the starting
gate. Reasons for such opposition become more apparent as we examine the
nature of those tools in greater detail.
Monetary policy involves the buying and selling of government bonds by
the Fed, and the increase or decrease of the discount rate, which is a key
interest rate at which banks borrow, and to which mortgage rates, bond rates,
and a host of other key interest rates are related. Further, the Fed establishes
the reserve requirement, stipulating the fraction of assets a given commer-
cial bank needs to keep on deposit with the Fed in order to legally make
loans to businesses and individuals. Such loans create checking accounts, or
demand deposits, which are the primary component of the money supply.
Through these tools, the Fed exercises considerable control over the finan-
cial sector of our economy, including interest rates, other terms of credit, the
money supply, and, indirectly, the volume of business activity to the degree
that it is financed by borrowing.
Fiscal policy deals with the level of taxation and government spending
and is determined by government decisions, made through the auspice