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Economic Policy
Anthony, McKenzie, and Whitney
Before the Depression
• Followed the policy of Adam Smith, social
philosopher who helped pioneer political
economics
• Wrote Wealth of the Nations which
emphasized the “invisible hand”
• “invisible hand” describes the self regulating
nature of the economy
After the Depression
• More government regulation and
involvement in business, unions, and trade
• Increased government limitation of the
power and corruption of business through
anti-trust policies
• Gave workers ability to unionize and
collective bargain
Fiscal Policy
• Fiscal Policy: Economics U$A
• Policy in which government regulates economy
with its powers to tax and spend
• Determined by Congress and the president
• Through the Budget
1. Recommended funding levels for the
next fiscal year (October to September)
2. Appropriations bills-required spending
Fiscal Policy Con’t
1. Mandatory Spending: expenditures
necessary in the U.S. budget that
are needed by programs in the
government
2. Discretionary Spending: negotiated
between the President and
Congress
Fiscal Policy Con’t
• extremely political as politicians try to
balance the competing goals of providing
goods and services to consumers and
keeping taxes low
• uses change in government spending or
taxation to produce desired changes in
discretionary income, employment rates, or
productivity
Monetary Policy
• Monetary policy:
•Tight- inflationary pressures- keeping
money in short supply
•Loose- during recession- getting more into
economy
• Allows the government to manage the
economy by controlling the money supply
through the regulation of interest rates
Monetary Policy Con’t
• changing the supply of money in circulation
in order to alter credit markets, employment,
and the rate of inflation
• isolated from political influence
• economic policy in which government
regulates the economy by manipulation
interest rates to control the money supply
Monetary Policy: The Federal Reserve
• independent commission that controls the
money supply through a system of twelve
federal banks
• Runs board of governors-seven members
appointed by the pres and confirmed by the
Senate who serve 4 year term
• Controls the amount of money that banks and
other institutions have available to loan and
controls the supply of money by controlling the
interest rates at which banks borrow money, by
limiting the amount the banks have to hold in
reserve, and by buying government securities
The Federal Reserve Con’t
• lots of money to loan,
interest rates drop-- people
borrow more, economic
activity increases
• no money to loan, charge
more for money (higher
interest rates), economic
activity slows down
• PROBLEMS: labor shortages,
agricultural shortfalls or
surpluses, or international
crises
• President of the Fed: Ben
Bernanke
Important Organizations/People
• Chairman of the Council of Economic Advisor-Austan Goolsbee
• Charged with offering the President objective economic advice
on the formulation of both domestic and international
economic policy.
• Director of the Office of Management and Budget-Jacob J. Lew
• The OMB's predominant mission is to assist the President in
overseeing the preparation of the federal budget and to
supervise its administration in Executive Branch agencies.
• Secretary of Treasury-Timothy Geithnew
• “Maintain a strong economy and create economic and job
opportunities by promoting the conditions that enable economic
growth and stability at home and abroad, strengthen national
security by combating threats and protecting the integrity of the
financial system, and manage the U.S. Government’s finances and
resources effectively.”
Economic Policy Acts
• Tax Relief Reconciliation Act of 2001-over 10 year period
(Majoritarian Politics)
•cut tax rates on all income groups
•increase the tax credit for children
•make it easier to deduct expenses
•eliminate the “marriage penalty”
•make it easier to save for education
•phase-out the tax on estates of deceased
Economic Policy Acts Con’t
• Congressional Budget Act of 1974
• Created the Congressional Budget Office(a
nonpartisan agency that provides economic data
to Congress)
• budget resolution-Set limits on revenues and
spending that governs Congress through
procedural objections
• concurrent resolution-adopted by both houses
but lacks the force of law and does not need
presidential approval
Additional Laws Regarding
Economic Policy
• Sherman Anti Trust Act
• First federalist anti-trust law that allowed the government to
take action against trusts and monopolies that restrained trade
• Lack of clarity of the definition of a “trust” created struggle in
the courts for many years
• Clayton Anti Trust Act
• An act to supplement the existing anti-trust laws—fought
unlawful monopolies and trusts
• Hawley-Smoot Tariff act of 1930 (Client Politics)
• Raised tariffs to historically high levels– it was put into place to
protect farmers against agricultural imports– represents the high
water mark of U.S. protectionism in the U.S.
GDP Grows For Five Consecutive Quarters
Trade Treaties
• protectionism: the view that laws should limit the sale of
foreign imports in order to protect producers at home
• A large trade deficit can negatively affect the US economy
because it means that Americans are buying more foreignmade goods than people from other countries are buying
American-made products(exports<imports)
• The deficit hurts American businesses, which could mean
fewer jobs and higher unemployment. As a result, unions are
more likely to support protects to trade policies, which would
narrow the trade deficit.
• Union-removal of NAFTA
• Concerns over employment moving abroad and no
replacement jobs available in the US-high unemployment
rates
Trade Treaties Con’t
• The government can implement protectionist policies in several
ways:
• place quotas or caps on the number of foreign imports that the
US can receive and it can levy tariff (government taxes on
foreign goods)
• create non tariff barriers, which are more convert measures to
protect the domestic economy
• Free trade policies eliminate measure such as quotes, tariffs, or
non tariff barriers, and encourage open borders between
trading partners
• Trade deficit: the difference between the value of the goods a
country imports and what it exports
Trade Treaties Con’t
• CAFTA: free trade agreement between United States and
the Central American countries of Costa Rica, El Salvador,
Guatemala, Honduras, and Nicaragua
• Support: economists always agree to a free trade
agreement but do not agree on the size and role of
government
• Opposition: argue that it will increase poverty by
prematurely opening markets to US agricultural goods
which are subsidized, making local farmers unable to
compete with imports, and the nations in question do
not have the ability to bear the costs of switching
resources with their available capital, nor deal with the
consequences of even short-term unemployment
Trade Treaties Con’t
• NAFTA: trade agreement that removed most of the
barriers to trade and investment that existed among the
U.S., Mexico, and Canada
• January 1, 1994-between United States, Canada, and Mexico
Bibliography
• Barbour, C. & Wright, G. (2006). Keeping the Republic. In Economic Policy
(Vol. 3, p. 769-801). Washington, D.C.: CQ Press.
• Learner, B. D. (n.d.). In Sherman Antitrust Act. Retrieved Feb. 19, 2011, from
http://www.u-s-history.com/pages/h760.html
• Eichengreen, B. (n.d.). In Smoot-Hawley Tariff. Retrieved Feb. 18, 2011, from
http://future.state.gov/when/timeline/1921_timeline/smoot_tariff.html
• Friedman, M. (Writer), & Samuelson, P. (Director). (2002). Fiscal Policy
[Television series episode]. Economics U$A. Leaner.org.
• Unknown, (2000). In Clayton Anti-Trust Act. Retrieved Feb. 20, 2011, from
http://www.historycentral.com/documents/Clayton.html
• Ameadeo, K. (n.d.). In FY 2011 Discretionary Federal Budget. Retrieved Feb.
19, 2011, from
http://useconomy.about.com/od/usfederalbudget/p/Discretionary.htm
• Ameadeo, K. (n.d.). In Mandatory Spending. Retrieved Feb. 19, 2011, from
http://useconomy.about.com/od/glossary/g/mandatory_spend.htm