Debates About Macroeconomic Policy

Introduction
Debates about macroeconomic policy will tend to focus on a couple of different schools of economic thought – the classical school and the Keynesian school, or derivatives thereof. One of the major debates that arises is with respect to whether or not government should increase spending in order to fight recessions. This debate also relates to things like having a balanced government budget. The latter is policy in many jurisdictions, mainly in the United States, reflecting a particular fiscal policy view of the classical school, which the Keynesian view is more often reflected in national-level policy, especially outside of the United States.
Increased Government Spending
With respect to how to best handle a recession, increased government spending is typically viewed as a yes/no decision. Keynes argued that government spending should be increased in order to help manage a recession, and this view is opposed by classical economists. Perhaps the most obvious recent example of this debate being put into practice came during 2009, when during the depths of recession, President Obama sought to increase spending to help stabilize the economy, and this was opposed by Republicans. There was obviously a political dimension to this as well, but the roots of the conservative position lie in the economic debate.
Keynes is credited with popularizing the philosophy that government spending can be used during times of recession to bolster the economy. The underlying principle is that the economy is comprised on a number of different growth drivers – government spending, business investment, net exports and consumer spending. In a recession, consumer spending and business investment decrease, and this means that if all else is equal, the economy will decrease as well. The government can, however, offset this decrease with an increase in government spending. Furthermore, there is a multiplier effect to an increase in government spending – certain businesses will have to expand to serve increase government spending, and more people can be employed. Both of these will feed more spending. Essentially, the increased government spending will create something of a virtuous cycle, a positive feedback loop that will counter the negative feedback loop of the recession (Investopedia, 2018).
This view of deficit spending is often a mischaracterization of Keynes precise prescription for maintaining full employment. Keynes argued that "the scale of investment should be equal to the savings which may be expected to emerge…when employment, and therefore incomes, are at the desired level." In other words, Keynes argued only in favor of deficit spending during times of recession, but was otherwise in against it. This socialization of spending was to be focused on temporary measures and only in times of recession in order to maintain as close to full employment as possible (Brown & Collier, 1995).
The classical view, or more accurately the neoclassical view, is that the markets should be left to find equilibrium, and that this would provide a better allocation of resources in the long run. Deficit spending, or indeed substantial influence of government in any form, would lead to inefficient allocation of resources. Government intervention will necessarily create distortions in the economy, meaning that even in times of recession it would be ultimately harmful for government to intervene (Khan & Aziz, 2011).
In essence, these two positions in the debate are approaching the issue from very different, and incompatible, perspectives. First, the Keynesian approach is very pragmatic, seeking to maintain full employment in the short run, and does not take into consideration to any real extent the desire to leave economic outcomes in the hand of the market. Equilibrium, in this view, is not necessarily going to occur quickly, and in any case will likely to cause winners and losers. Economic equilibrium, even if considered a noble goal, is not the same thing as having a society where everybody has a job, can pay for their lives, or even every country.
The neoclassical view, by contrast, is unconcerned with the human outcomes. To the extent that human outcomes matter, it is more on an aggregate long-run level, and if there are short-run casualties, so be it. The purity of the pursuing an economy driven by the market is a worthy goal, in fact worthier than any other. The question of whether a purely market-driven economy is actually desirable is assumed, rather than addressed, in neoclassical economic thought – of course the market is ideal because in theory it has the best asset allocation. As such, anything that runs counter to economic purity – such as deficit spending for recessions – is something undesirable.
Balanced Budgets
A Keynesian will naturally bristle at the idea of a balanced budget law. This is often misinterpreted. The Keynesian view is not opposed to balanced budgets, just mandatory ones. This view actually holds that balanced budgets should be the norm during prosperous times, and the Keynesian view opposes the profligate spending that occurs in most Western nations today – in a strong economy the US should run a surplus, and the fact that it does not runs against Keynesian principles (Brown & Collier, 1995).
Running a balanced budget is, in the neoclassical view, is one of the keys to economic efficiency. Deficit spending increases lifetime consumption by shifting taxes to subsequent generations, and this in turn means that savings are lower than they should be. Interest rates increase to restore capital markets to balance, and this crowds out private capital accumulation (Bernheim, 1989). The neoclassical view therefore sees an unbalanced budget as one that distorts markets, and creates a situation where assets are not allocated to their optimal efficiency. It is more important to maintain balanced budgets even in the face of recession, but especially outside of recession, as to fail to do so increases economic inefficiency. This is to the detriment of the economy as a whole, but ultimately to all participants in that economy, albeit unequally.
The challenge with the balanced budget concept is that when there is a law in place mandating a balanced budget, this limits the policy responses of government. A local government that could sell bonds to cover a temporary shortfall instead has to cut services. It can be more difficult to restore services later, once cut. In other words, the forces that bring economics to equilibrium do not work immediately or instantly. The constraints of the real world mean that equilibrium is not going to occur quickly, and that there might be negative consequences in the meantime for people.
The neoclassical view of the balanced budget has popular appeal in the sense that governments have tended towards profligacy, where they simply never balance the budget even during boom times. The stickiness of most forms of government spending, neoclassical economists argue, need to be countered by measures that force governments to evaluate their spending periodically, and make cuts where necessary. Even Keynesians would agree that governments should not run persistent deficits, and it is the real world stickiness of government spending where the concept of running a temporary deficit runs into hard reality, and becomes more difficult to execute. In a sense, both economic theories are very difficult to execute in the real world, and the fact that these different views exist also means that there are both views expressed in public policy. That creates a hodgepodge policy where different aspects of policy are not even aligned with each other, ensuring inefficiency and sub-optimal outcomes no matter which approach is dominant.
References

Bernheim, D. (1989) A neoclassical perspective on budget deficits. Journal of Economic Perspectives. Vol. 3 (2) 55-72.

Brown, E. & Collier, B. (1995) What Keynes really said about deficit spending. Journal of Post Keynesian Economics. Vol. 17 (3) 341-355.

Investopedia (2018) What is deficit spending. Investopedia. Retrieved June 3, 2018 from https://www.investopedia.com/terms/d/deficit-spending.asp

Khan, M. & Aziz, G. (2011) Neoclassical vs Keynesian approach to public policy – the need for synthesis. MPRA Paper No. 62856.