Economic Policy MakingEconomic Policy Making

Two Major Worries Regarding The Two Major Worries Regarding The U.S. EconomyU.S. Economy

Unemployment RateUnemployment Rate InflationInflation

– Consumer Price Index (CPI)Consumer Price Index (CPI)

Instruments for Controlling the Instruments for Controlling the EconomyEconomy

Since the Great Depression and the New Since the Great Depression and the New Deal, government has been actively Deal, government has been actively involved in steering the economy.involved in steering the economy.

The principle of laissez-faire, keeping The principle of laissez-faire, keeping government out of the economy, is largely government out of the economy, is largely gone.gone.

The most important tool the government The most important tool the government has to manage the economy is its control has to manage the economy is its control over the money supply.over the money supply.

Monetary PolicyMonetary Policy

An economic theory called An economic theory called monetarismmonetarism holds holds that the supply of money is the key to the that the supply of money is the key to the nation’s economic health.nation’s economic health.

Monetarists believe that government should Monetarists believe that government should control the money supply to encourage control the money supply to encourage economic growth and restrain inflation.economic growth and restrain inflation.

Politicians worry constantly about the money Politicians worry constantly about the money supply because it affects the interest rates we supply because it affects the interest rates we (constituents) all pay.(constituents) all pay.

The Federal Reserve SystemThe Federal Reserve System

The “Fed”The “Fed” Created by Congress in 1913 to regulate the Created by Congress in 1913 to regulate the

lending practices of banks (the money supply).lending practices of banks (the money supply). The Federal Reserve System is intended to be The Federal Reserve System is intended to be

beyond the control of the president and Congress.beyond the control of the president and Congress.– Its 7 member Board of Governors is appointed by the Its 7 member Board of Governors is appointed by the

president and confirmed by the Senatepresident and confirmed by the Senate– Board members are given 14 year termsBoard members are given 14 year terms

How the Fed WorksHow the Fed Works

Federal Open Market Committee studies vast Federal Open Market Committee studies vast amounts of economic data.amounts of economic data.

The FOMC sets the “federal funds rate” which is the The FOMC sets the “federal funds rate” which is the rate banks charge each other for overnight loans.rate banks charge each other for overnight loans.

The Fed purchases and sells government bonds from The Fed purchases and sells government bonds from banks.banks.

By buying or selling bonds from banks, the Fed By buying or selling bonds from banks, the Fed determines whether banks have more or less money determines whether banks have more or less money to lend out.to lend out.

The more money banks have to lend out, the cheaper The more money banks have to lend out, the cheaper borrowing is.borrowing is.

If banks have less to loan, loans become more If banks have less to loan, loans become more expensive and interest rates rise.expensive and interest rates rise.

The Fed Can Profoundly Influence The Fed Can Profoundly Influence the State of the Economythe State of the Economy

Fiscal PolicyFiscal Policy

Describes the impact of the federal budget- Describes the impact of the federal budget- taxing, spending, and borrowing- on the taxing, spending, and borrowing- on the economy.economy.

Congress and the president shape fiscal Congress and the president shape fiscal policy.policy.

The use of fiscal policy to stimulate the The use of fiscal policy to stimulate the economy is most often associated with economy is most often associated with advocates of big government.advocates of big government.

Keynesian Economic TheoryKeynesian Economic Theory

Named after English economist John Maynard Named after English economist John Maynard Keynes.Keynes.

““Demand-side economics”Demand-side economics” 1936: Keynes emphasized that government spending 1936: Keynes emphasized that government spending

could help the economy weather its normal ups and could help the economy weather its normal ups and downs.downs.

If businesses were not able to expand, it would be up If businesses were not able to expand, it would be up to the government to pick up the slack.to the government to pick up the slack.

If no jobs were available, government should create If no jobs were available, government should create them.them.

Democrats and Republicans alike adhered to the Democrats and Republicans alike adhered to the basic tenets of Keynesian economics until Reagan.basic tenets of Keynesian economics until Reagan.

Supply-side EconomicsSupply-side Economics

Reagan’s economic advisors proposed a radically Reagan’s economic advisors proposed a radically different theory based on the premise that the key different theory based on the premise that the key task for government economic policy is to task for government economic policy is to stimulate the supply of goods, not their demand.stimulate the supply of goods, not their demand.

To supply-siders, government soaked up too much To supply-siders, government soaked up too much of the Gross Domestic Productof the Gross Domestic Product

By taxing too heavily, spending too freely, and By taxing too heavily, spending too freely, and regulating too tightly, government curtailed regulating too tightly, government curtailed economic growth.economic growth.

Republicans have come to accept supply-side Republicans have come to accept supply-side economics, especially the policy of tax cuts.economics, especially the policy of tax cuts.

Obstacles to Controlling the Obstacles to Controlling the EconomyEconomy

““Political business cycle”Political business cycle” Government makes economic policy very Government makes economic policy very

slowly.slowly. Budget process is dominated by Budget process is dominated by

“uncontrollable expenditures.”“uncontrollable expenditures.” Private sector dominates the U.S. economy.Private sector dominates the U.S. economy.

Economic interests far outnumber Economic interests far outnumber any other kind of interest groupsany other kind of interest groups

BusinessBusiness ConsumersConsumers LaborLabor

Business and Public Policy: Business and Public Policy: Regulation Regulation

Suspicions over concentrated power has led to Suspicions over concentrated power has led to government regulations over business.government regulations over business.– Multinational Corporations- businesses with vast Multinational Corporations- businesses with vast

holdings in many countries with huge budgets. holdings in many countries with huge budgets. – Antitrust policy: to ensure competition and prevent Antitrust policy: to ensure competition and prevent

monopoly. Government can sue a company in court.monopoly. Government can sue a company in court.– The main regulatory agency responsible for regulation The main regulatory agency responsible for regulation

of business practices is the Securities and Exchange of business practices is the Securities and Exchange Commission (SEC). They regulate stock fraud and keep Commission (SEC). They regulate stock fraud and keep an eye on business accounting practicesan eye on business accounting practices

Business and Public Policy: Business and Public Policy: SubsidiesSubsidies

Federal Government is the principle source Federal Government is the principle source of research and development funding in the of research and development funding in the U.S.U.S.

The Department of Commerce serves as a The Department of Commerce serves as a storehouse of assistance for businesses: storehouse of assistance for businesses: data on products and markets; helps data on products and markets; helps businesses export their wares, protects businesses export their wares, protects inventionsinventions

Consumer PolicyConsumer Policy Years ago the motto was “let the buyer beware.” Consumers Years ago the motto was “let the buyer beware.” Consumers

and their interests were ignored.and their interests were ignored. The first major consumer protection policy in the U.S. was the The first major consumer protection policy in the U.S. was the

Food and Drug Act of 1906, which prohibited interstate Food and Drug Act of 1906, which prohibited interstate transportation of dangerous or impure foods and drugs.transportation of dangerous or impure foods and drugs.

Today the FDA (Food and Drug Administration) has broad Today the FDA (Food and Drug Administration) has broad regulatory powers over the manufacturing, contents, marketing regulatory powers over the manufacturing, contents, marketing and labeling of food and drugs.and labeling of food and drugs.

Consumerism was a sleeping political giant until the 1960’s and Consumerism was a sleeping political giant until the 1960’s and consumer advocate Ralph Nader.consumer advocate Ralph Nader.

1960’s and 1970’s saw a flood of consumer protection 1960’s and 1970’s saw a flood of consumer protection legislation and the CPSC was created.legislation and the CPSC was created.

Consumer Credit Protection Act: Stipulates that whenever you Consumer Credit Protection Act: Stipulates that whenever you borrow money, you must be informed of the exact amount of borrow money, you must be informed of the exact amount of interest you’ll payinterest you’ll pay

Labor and GovernmentLabor and Government

1935 National Labor Relations Act (Wagner Act) 1935 National Labor Relations Act (Wagner Act) guaranteed workers the right to collective guaranteed workers the right to collective bargaining.bargaining.

Taft-Hartley Act tipped legislation the other way in Taft-Hartley Act tipped legislation the other way in 1947; government was given some power to halt 1947; government was given some power to halt strikes and states could adopt “right to work” laws strikes and states could adopt “right to work” laws (free-rider problem is the result).(free-rider problem is the result).

Some big victories for minimum wage and Some big victories for minimum wage and unemployment compensation.unemployment compensation.

Unions have fallen on hard timesUnions have fallen on hard times

Liberals vs. ConservativesLiberals vs. Conservatives

What they argue about when it comes to What they argue about when it comes to economic policymaking is the scope of economic policymaking is the scope of government involvement in the economy.government involvement in the economy.

Liberals favor more regulations over Liberals favor more regulations over businesses, conservatives favor less.businesses, conservatives favor less.

Whereas liberals focus on the imperfections Whereas liberals focus on the imperfections of the market and what government can do of the market and what government can do about them, conservatives focus on the about them, conservatives focus on the imperfections of government.imperfections of government.