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
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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)