Transcript Chapter 16
Chapter 16 Economic Policy What is policy? • officially expressed intention backed by either a reward or a punishment History of Economic Policy • Prior to 1929 there was little government intervention in the economy (consistent with Adam Smith). • But the Great Depression convinced many Americans that it was the government’s job to provide job security and a host of New Deal programs that injected the federal government into banking, labor, working conditions, minimum wages, and other areas of the economy • After Sept 11 Congress wrote a $15 billion financial package to prop up the airline industry. • During the current recession (2008) Congress passed a $700 billion bail out of the financial system and $25 billion bail out for the “Big Three” auto makers (GM, Ford, and Chrysler). Economic Theory • Keynesianism—government should increase spending during recessions and increase taxes or reduce spending during economic booms • Supply-side theory—government should sharply cut taxes, especially on the wealthy, so that they will be able to create more jobs and spend more Reaganomics • Sharply reduce income taxes (especially on the wealthy) • Reduce spending on some domestic programs • Sharply increase military spending • Results—economy was stimulated and national debt was dramatically increased Most Americans dislike the idea of the government spending more money that it receives. Then why did politicians do little about it? • Raise taxes? • Cut spending? Taxation • Progressive Taxation- Taxation that hits the upper-income brackets • Regressive Taxation- Taxation that hits the lower-income brackets • Policy of Redistribution of Wealth- An objective of the graduated income tax-to raise revenue in such a way as to reduce the disparities of wealth between the lowest and the highest income brackets. What would you like to cut from the federal budget? (Red=Actual Percentage of Budget) Federal Budget • Discretionary Spending- Federal spending on the programs that are controlled through the regular budget process. • Entitlements – Federal social spending that workers/retirees/disabled/ have been promised by the government • Interest payments – Payments on the interest on the federal debt Entitlements • • • • • Social Security Medicare Medicaid Veterans’ benefits Food stamps 2014 How does government make market economies possible? • Establishing law and order – predictable and stable legal system • Defining rules of property – labor, ideas, real estate, concrete goods • Enforcing contracts Governing rule of exchange – what can be sold? (not drugs, for example) when can things be sold? (i.e. sometimes witnesses needed for agreements to borrow money) • Setting Market Standards – creating a standard for products (when can you call something “dark chocolate” or “fresh” or “organic” -- weights and measures (to make sure a pound is a pound) • Providing Public Goods –i.e. highways for trade • Creating a labor force – compulsory education laws, keep social benefits low enough to encourage work • Regulating damaging behavior whose public costs exceed private costs (i.e. regulating pollution) • Promoting competition – breaking up monopolies Three Main Goals of US Economic Policy 1. Maintaining public order and private property 2. Maintain a strong economy 3. Encouraging business development Maintaining public order and private property • Private Property- valued highly in US • Eminent Domain- the right of government to take private property for public use, with reasonable compensation awarded for the property (5th Amendment) Encouraging business development • Categorical Grants-in-Aid- Funds given by Congress to states and localities, earmarked by law for specific categories such as education or crime prevention. • Subsidies- governmental grants of cash or other valuable commodities such as land to individuals or organizations. Subsidies can be used to promote activities desired by the government, to reward political support, or to buy off political opposition. • Contracting Power- The power of government to set conditions on companies seeking to sell goods or services to government agencies. • Logrolling- A legislative practice wherein reciprocal agreements are made between legislators, usually in voting for or against a bill. In contrast to bargaining, logrolling unites parties that have nothing in common but their desire to exchange support. Promoting Business Development by Regulating Competition • Antitrust Policy- Government regulation of large businesses that have established monopolies. • Deregulation- A policy of reducing or eliminating regulatory restraints on the conduct of individuals or private institutions. • Regulation- A particular use of government power in which the government adopts rules imposing restrictions on the conduct of private citizens. Fiscal Policy • The use of government expenditure (spending) and revenue collection (taxation) to influence the economy. Monetary Policy • Efforts to regulate the economy through manipulation of the supply of money and credit. America’s most powerful institution in the area of monetary policy is the Federal Reserve Board The “Fed” • Federal Reserve System • Members serve 14 year terms. • The Chairman serves for 4 years (then go back to being regular members). • Its members are appointed by the President and confirmed by the Senate. • The “Fed” has 7 members. What does the “Fed” do? • Regulates money supply (in circulation and bank deposits) • Regulates price of money (by interest rates)