Transcript Economic Policymaking

Government in America: People, Politics, and Policy
Updated with 15th Edition
Edwards/Wattenberg/Lineberry
CHAPTER 17
Economic Policymaking
Government, Politics, and the Economy
 Introduction
 Capitalism:
An economic system in which individuals and corporations,
not the government, own the principal means of
productions and seek profits
 Profits determine production and prices
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Mixed Economy:
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An economic system in which the government is deeply
involved in economic decisions through its role as regulator,
consumer, subsidizer, taxer, employer and borrower
Multinational Corporations:

Businesses with vast holdings in many countries –
Microsoft, Disney, Coca-Cola. Products flow between
regions and jobs go to where they can be done cheaply
The Dilemma of Wal-Mart
 Third largest company in the world in 2009 ($406
billion in revenue)
 Low prices for products, low wages for workers
 Government regulation affects WM –
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SEC
minimum wage
discourage unions
forbidden from hiring undocumented workers
 Globalization
 Almost all goods they sell are foreign (good for consumers, bad
for jobs)
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Voters, Politicians and the Economy
 Economic conditions are the best single predictor of
how voters perceive the president is doing his job
(pocketbook voting)
 Economy in 2008 was a major factor in Obama
taking office (“It’s the Economy, Stupid”)
 Democrats stress keeping unemployment low (who
are their constituents?)
 Republicans worry about inflation (who are their
constituents?)
Unemployment
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Unemployment Rate:
measured by the Bureau of Labor Statistics (BLS)
defined as the proportion of the labor force actively
seeking work, but unable to find jobs.

Bad economy = social problems (higher suicide and
homicide rates, drug and alcohol related deaths,
depression, etc.)

Unemployment impacts minorities 2-3 times more than
whites, young more than middle aged

BLS now also releases an UNDERemployment rate
Inflation
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Inflation: the rise in prices for consumer goods
Consumer Price Index: the key measure of inflation. Goal is to
reflect changes over time in the amount consumers need to
spend to maintain a certain standard of living. How is CPI
measured?
Three major time periods of inflation:
1973 and 1974 – OPEC cut oil supplies because of US support of
Israel during war with Egypt and Syria
 1979 - Iranian revolution – oil supply cut from Middle East
 1991 – Iraq invaded Kuwait, people worried that oil supplies would
be affected
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People on fixed incomes are hit particularly hard by inflation
Government, Politics, and the Economy
What do you think this graph would look like if it were
extended out to today?
Government, Politics, and the Economy
What has happened to the cost of consumer goods recently?
Do you notice any changes?
Instruments for Controlling the Economy
- The government has great impact on the economy but it is
limited by a commitment to the free enterprise system
Historically –
 1929 Stock Market Crash – Hoover, Laissez faire policies
 New Deal – federal policies aimed at putting the US
economy back on track
 Government has been very active in steering the economy
since the Great Depression and the New Deal
 US Government has 2 tools to help guide the economy
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Monetary policy
Fiscal policy
Policies for Controlling the Economy
 Monetary Policy and “the Fed”
 The head of the Federal Reserve Board is Janet Yellen. She
has more power over the US economy than even the
president
 Monetary Policy: the manipulation of the supply of
money and credit in private hands; controlled by “the
Fed”
 Monetarism – economic theory that holds that the supply
of money is the key to the country’s economic health
 Too much cash and credit produces inflation, too little
and we see credit tighten and unemployment rise
 The money supply affects the interest rates we pay for
houses, cars, businesses, etc.
The Federal Reserve System

Main policymaker is the Board of Governors of the
Federal Reserve System–the “Fed”
 Created in 1913 to regulate lending practices of
banks and thus the money supply
 They are beyond the control of the President and
the Congress
 Seven member board appointed by the President,
for 14 year terms. From the board members, a
chairman is chosen. Current chairperson
of the Fed is Janet Yellen.
Policies for Controlling the Economy
 Monetary Policy and “the Fed” (continued)
 The Fed’s instruments to influence the supply of money
in circulation:
 Sets the discount rate (rate at which banks borrow
money from the Fed)
 Sets reserve requirements (how much money banks
have to have on reserve at all times)
 Buys and sells government bonds

Through the use of these actions, the Fed can affect the
economy.
Policies for Controlling the Economy
 Fiscal Policy of Presidents and Parties
 Fiscal Policy: the policy that describes the impact of
the federal budget on the economy (How much is
the government taxing, borrowing and spending?)
 Fiscal policy is controlled by the President and the
Congress
 There are 2 different schools of thought:
Keynesian Economic Theory: government spending helps
the economy weather its normal ups and downs, creation of
federal jobs programs, etc may be necessary
 Supply-side economics: tax cuts will stimulate the supply

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Instruments for Controlling the Economy
 Fiscal Policy of Presidents and Parties, (continued)
 Supply-Side Economics: the policy that says there is too much
taxation and not enough money to purchase goods and
services. Favored by Republicans (Reagan, Bush, etc.)
 Reduce taxation and government regulation then people will
work harder, and thus create a greater supply of goods
 Also called “trickle down economic theory”
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Why It Is Hard to Control the Economy
 Some think politicians manipulate the
economy to win reelection.
 But there are problems with that thought
pattern:
Things like the budget are prepared in advance of
when they go into effect
 Government makes economic policy slowly
 Politicians do not always choose the correct path to
ensure American prosperity
 Capitalism can also affect the economy; private
sector, not the public sector dominates the
economy. Federal government spends less than 20
percent of GDP

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Politics, Politics, and the Internat’l Economy
 Protectionism: the economic policy of shielding an
economy from imports
 World Trade Organization (WTO): the international
organization that regulates international trade
 Free trade is controversial as jobs have increasingly
been outsourced.

But short-term pain equals long-term gain
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Arenas of Economic Policymaking
 Business and Public Policy
 Corporate Corruption and Concentration
Increased incidence of bankruptcy and scandals
 Increased number of corporate mergers
 Antitrust policy: a policy designed to ensure competition and
prevent monopoly, which is the control of a market by one
company
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Arenas of Economic Policymaking
 Business and Public Policy (continued)
 Regulating and Benefiting Business
New wave of regulation
 Congress passed law in 2002 that toughened penalties for
stock fraud
 Creation of Accounting Oversight Board to regulate
accounting industry
 Businesses benefit from regulation, too
 Copyrights and patents
 Government may loan businesses money.
 Government collects data that business use.

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Arenas of Economic Policymaking
 Consumer Policy: The Rise of the Consumer Lobby
 Consumers historically have had little government
protection.
 Food and Drug Administration (FDA): created in 1913;
regulates the manufacturing, contents, marketing, and
labeling of food and drugs
 “Consumerism” – Ralph Nader, 1960s
 Federal Trade Commission (FTC): responsible for
regulating false and misleading trade practices, which
now includes consumer lending practices
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Arenas of Economic Policymaking
 Labor and Government
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Government historically sided with business over labor
unions.
National Labor Relations Board (NLRB): regulates
labor-management relations; created in 1935 by the
Wagner Act, guarantees workers the right of collective
bargaining
The Taft-Hartley Act (1947) continued to guarantee
unions the right of collective bargaining, but prohibited
various unfair practices by unions.
 President can halt major strikes through court
injunction
 States are permitted to pass “right to work” laws
Two notable successes gained by unions are that the
government now provides unemployment compensation
and a minimum wage.
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Understanding Economic Policymaking
 Democracy and Economic Policymaking
 Voters expect more of politicians that they can
control
 Sometimes economic theory and democratic theory
may be at cross purposes.
 It is difficult to make decisions that hurt groups or
involve short-term pain for long-term gain.
 Economic Policymaking and the Scope of
Government

Liberals tend to favor more while conservatives favor
less government involvement in the economy.
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Summary
 Political and economic sectors are closely
intermingled.
 Voters expect a lot from politicians, more than they
can deliver on the economy
 Two major instruments available to government for
managing the economy—monetary and fiscal policies
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