Transcript monetary policy

Big Questions of Public Policy
* How does the government decide which
problems to fix?
* How do the big institutions of government
affect public policy?
* What are the costs, benefits, and politics of
making public policy?
What are the political effects of this data?
Public Policy
What is Public Policy?
Public Policy = how to solve a “public” problem
- the process of policy coming into being and evolving over time
Making Public Policy in 5 Steps
1. The National Agenda
- getting on the radar
2. Policy Formulation
- determining the remedy
3. Policy Adoption
- choosing the remedy
4. Policy Implementation
- regulating the policy
5. Policy Evaluation
- assessing policy
Setting the Political Agenda
• The political agenda: something that
is important to lots of people
–Healthcare for all?
• Getting on the agenda:
- major event occurs
- Trend in statistics
- interest group awareness
- media awareness
• Should policy be made radically or
incrementally?
When Obama Entered Office…
Institutions Affect Public Policy
• Congress makes laws; President
enforces laws
– Both help decide policy agenda
• Court decisions require
enforcement assistance school
desegregation, abortion
– Often tackle issues ignored by
legislature/executive
• The bureaucracy works with
interest groups, Congress,
president,
– Iron Triangles
– Issue Networks
Other Influences on Public Policy
• Groups may react if their issues are being ignored
– Current ex’s: Tea Party, Immigration Reform
• States are laboratories for future national policies
– Federalism
– Block Grants
Costs, Benefits, Politics Effect on Policy
* In order to make a policy decision,
policymakers must assess the following
items:
• Cost: any burden, monetary or non-monetary,
that affect a group/people by a policy
• Benefit: any satisfaction, monetary or nonmonetary, that affect a group/people by a policy
• Politics = who actually benefits/pays and
who ought to benefit/pay
- getting items on the policy agenda
- helping one group over another group
The POLITICS of Making Public Policy
• Majoritarian politics: benefits for all & costs for all
– Ex: Military spending
• Interest group politics: benefits for a few & costs for a few
– Ex: General Motors & car factory workers
• Client politics: benefits for a few & costs for all
– Pork-Barrel Projects  “Earmarks”
– Ex: “Bridge to Nowhere” in Alaska
• Entrepreneurial politics: Benefits for all & costs for a few
– Ex: food safety regulations, environment safety
Classifying and Explaining the Politics of
Different Policy Issues
Economic Policy
What words, concepts, laws,
powers, etc. have we learned
about this year that are connected
to economic policy?
Big Questions of Economic Public Policy
* How does the government measure the
economy?
* How does the government use fiscal policy &
monetary policy to create economic policies?
* How does political ideology affect the
economic decisions of policymakers?
Review: What is a Mixed Economy?
Mixed Economy:
* Combination of:
Market Economy
&
Command Economy
**We have economic choices (market),
with some govt. regulation and
monitoring (command)
The US Government’s Influence on the Economy
* Government’s 3 Goals for the US Economy:
(1) Keep production levels growing
(2) Maintain steady prices
(3) Encourage everyone to have a job
* US Govt. measures each economic goal monthly
* US Govt. creates policies “to help” the economy
meet each goal:
- Congress & President = Fiscal Policy
- The Federal Reserve = Monetary Policy
No Magic Wand Exists to “Fix”
the Economy!
Measuring the Economy
* In Sports we have different statistics that tell us how
well a player or team is performing. Based upon this
data, we as fans are able to judge if a player or team is
excelling or struggling.
* In economics, we have statistics that tell us how well
the country’s economy is performing. These statistics
include: GDP, CPI, and the Unemployment rate. Based
upon these statistics, the government is able to take
actions (fiscal policy & monetary policy) to help the
economy meet each goal.
Measuring the Health of our Economy
1. Gross Domestic Product (GDP) =
measures the total value of all new goods &
services produced in the USA
2. Consumer Price Index (CPI)= measures
how much money people spend on consumer
goods
- Measures changes in inflation (increase in
the price of goods)
- Too much money in circulation can lead to
HIGH levels of inflation look at Zimbabwe
3. Unemployment Rate: measures the
percentage of people who want a job, but
can’t find one
Global GDP
Leaders,
(2011 IMF)
How Inflation Works?
1. Did you have to spend more or less over time to get the same amount of
gasoline?
2. Did the value of a dollar gain or lose purchasing power over time?
What determines
the price of
Gasoline?
Source:
http://www.eia.gov
The Business Cycle: measures the long
term health of the economy
National Business Activity, 1880-Present
Definition
Prosperity Economy
GDP
Data
High
is
booming!
CPI
Employment
(inflation) Data
Data
Slowly
Rising
BIG labor
demand (low
unemployment)
Recession
Economy Slowing Slowing
Down
is slowing
Depression
Economy Really
is in bad LOW
shape
Really
LOW
Slowing labor
demand
Really LOW
demand (high
unemployment)
The Politics of Prosperity
• Many voters often look at how their own
economic situations have changed when they
choose candidates retrospective voting
– Are poor/prosperous economic conditions the
result of our elected/unelected politicians?
– How much affect can the government have
on manipulating the economy?
How to Keep the Economy Stable?
Fiscal Policy & Monetary Policy
Fiscal vs. Monetary Policy
What the Heck Happened to the
Economy in 2008?!?!?!
As you view the video, answer the following questions.
1. Describe the causes of the economy’s drastic decline in 2008.
2. How is the economy still feeling the impact of the 2008 events?
3. Write down something interesting that you learned that you did not already
know?
Fiscal Policy vs. Monetary Policy
Fiscal Policy
Def: Taxing & Spending policies
Tools Involved: Budget-making
(taxing & spending)
Who is the boss? Congress &
President involved
Speed of Policy: Quicker way to
affect the economy
Monetary Policy
Def: Manipulating the money supply of
the economy controlling inflation
Tools Involved:
- Cut/Raise Interest Rates
- buy/sell securities  encourage or
discourage the borrowing of money
Who is the boss? “The Fed”
- Independent of Politics
Speed of Policy: Slower way to affect
the economy
Politicians and the Economy
•Elected officials are tempted to take a short-term view of the
economy and satisfy the self-regarding voter “Politics 101”
•Government can’t magically improve the economy
– Each economic/political ideology has their own theories on
helping the economy
Ideology and the Economy
• Ideology plays large role in shaping
policy choices
• Democrats tend to want the government
to play an active role to improve the
economy
• Republicans tend to want the
government to play a minimal role to
improve the economy
• BOTH parties desire
– high GDP
– low unemployment
– steady inflation
Party ID and
Attitudes Toward
Government
Spending
Blue = Democrat
Red = Republican
Fiscal Policy
* Fiscal Policy = Congress &
President use taxing and
spending policies to keep the
economy booming while making
voters happy!
* Fiscal Policy is made via the
budget
2012 Budget Proposal
2012
Federal
Budget
Proposal
The Politics of Taxing and Spending
• Majoritarian politics yields conflicting
recommendations: lower taxes, less debt
• Meaningful tax cuts are politically difficult
– Who should get their taxes cut?
– new programs tend to be more popular
with politicians how will they be
funded?
• Different Fiscal Policy philosophies exist…
Fiscal Policy Theories…
•Keynesianism: When demand in
the economy is too low, the
government should pump
money into the economy by
spending more than it collects in
taxes running a deficit 
– Democrats often favor this
approach
– Republicans often dislike this
approach
Fiscal Policy Theories…
• Supply-Side Tax Cuts: the economy will improve with less govt.
interference, therefore the govt. should lower taxes &
regulations
– Lower taxes would create incentives for private investment and
purchasing
– Greater economic productivity will then produce more tax
revenue
– Voodoo Economics?
Fiscal Policy Theories…
Reaganomics: refers to the ideas promoted
by President Reagan in the 1980s
A. Deregulation remove
laws/rules/regulations that restrain industries
B. Increase military spending led to large
deficits & the increase in national debt
C. Cut tax rates (income & capital gains)
D. Lower inflation (technically the Fed’s job)
** Overall Effect: Stimulated economy—
unemployment decreased, business activity
increased, but deficits increased
What Should the Government do if the
Economy is in a Recession?
If the
Economy is
in a
recession…
The Economy
should recover
and expand!
Fiscal Policy Fixes:
Taxes
&
Govt. Spending
Overall Govt. Goal in a Recession: INCREASE the amount of
money going into the US economy to stimulate growth!
The Effect of More
Money in the US
Economy
* In a recession, the
GOVT. puts more $$
circulation:
4. Stores hire
more people
The cycle will REPEAT itself
until the amount and value of
money deflates.
3. Stores & businesses
make more money
1. People have
more money
2. People spend money
at stores & businesses
What fiscal policy decisions do you think the US
government should have made between 2008-2009?
Monetary Policy
Balancing the Money Supply
*Fact: The amount of money in an economy is important
because it affects the level of spending, employment,
prices and economic growth.
Too much spending can lead to inflation (low
value of a dollar)
Too little spending can lead to unemployment
causing the production of goods to decrease
*Therefore: The Government needs tools
to keep inflation steady and keep
employment high!
Monetary Policy
Definition: manipulating the amount of money in circulation
to alter credit markets, employment, and the rate of
inflation.
–Federal Reserve System makes monetary policy
–Monetary Policy Philosophies: The Fed can either
increase/reduce the money supply:
• Increasing the rate of growth is loose monetary policy
• Reducing the rate is tight monetary policy
The Federal Reserve
• Members are appointed by
the president, confirmed by
the Senate
– serve a nonrenewable
fourteen-year term
– Can be removed for cause
• Somewhat independent of
both the president and
Congress
– Why is this a good thing?
Loose v. Tight Monetary Policy
LOOSE Monetary Policy
-Fed encourages MORE
spending of money
TIGHT Monetary Policy
-Fed encourages LESS
spending of money
- Goal is to stimulate economy - Goal is to lower inflation by
by putting more dollars into
removing dollars out of
circulation
circulation
The Fed’s Most Important Power
* The Fed announces changes to monetary policy by raising or
lowering the federal funds rate, a government-controlled INTEREST
RATE for funds that banks borrow from each other:
* The lower the interest rate more lending is
encouraged
- LOOSE monetary policy
* The higher the interest rate less lending is
encouraged
- TIGHT monetary policy
• Why does the Fed have the power of controlling interest rates
versus Congress or the President?
What is
the opinion
of this
cartoonist?
* The work of the FOMC (Federal
Open Market Committee)
buy/sell government securities
(Government IOUs)
1. If the Fed buys securities—
puts $$ into circulation more
$$ is borrowed & spent;
encourages economic growth
- loose monetary policy
2. If the Fed sells securities—
takes $$ out of circulation less
$$ is borrowed & spent;
encourages lower inflation
- tight monetary policy
Another Power of
the Fed
What Should the Government do if the
Economy is in a Recession?
If the
Economy is
in a
recession…
Monetary Policy Fixes:
Reserve Requirement
&
Discount Rate
&
Interest Rates
(Buying Securities)
The Economy
should recover
and expand!
Overall Govt. Goal in a Recession: INCREASE the amount of
money going into the US economy to stimulate growth!
What monetary policy decisions do you think the US
government should have made between 2008-2009?
Monetary vs. Fiscal Policy
* Monetary policy is slow, but the Fed can make a policy change
more quickly than fiscal policy actions
* Monetary policy cannot force people to borrow money in a
recession
* Monetary policy is more powerful against inflation
* Fiscal policy is more effective against recessions, because
the government does the borrowing itself (rather than
hoping private institutions will borrow money)
The Effect of More
Money in the US
Economy
4. Stores hire
more people
1. People have
more money
The cycle will REPEAT itself
unless something bad
happens to the economy
3. Stores & businesses
make more money
2. People spend money
at stores & businesses
Fiscal Policy Fixes:
Taxes
&
Govt. Spending
Monetary Policy Fixes:
Reserve Requirement
&
Discount Rate
&
Interest Rates
(Buying Securities)
* In a
recession,
the GOVT.
puts more
$$
circulation:
The Effect of LESS
Money in the US
Economy
4. Stores hire
less people
1. Harder for people
to get money
The cycle will REPEAT itself until
the amount of money deflates and
the value increases.
3. Stores & businesses
make less money
2. People borrow & spend
less money at
stores & businesses
Fiscal Policy Fixes:
Taxes
&
Govt. Spending
Monetary Policy Fixes:
Reserve Requirement
&
Discount Rate
&
Interest Rates
(Sell Securities)
* During High
Inflation, the
GOVT. wants
less $$
circulation: