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Chapter 17 Outline
I. GOVERNMENT, POLITICS, AND THE ECONOMY
A. In the United States, the political and economic sectors are closely intermingled in a mixed economy, where
the government, while not commanding the economy, is still deeply involved in economic decisions.
1. The United States operates under capitalism an economic system in which individuals and
corporations own the principal means of production, through which they seek to reap profits.
2. Yet the American system is not one of pure capitalism; it actually has a mixed economy a system in
which the government, while not commanding the economy, is still deeply involved in economic
decisions.
3. Americans also draw sharp distinctions between “our economy” and “the world economy.” Our new
economy is also an international and global economy. Government and the economy in the United States
have always been closely linked.
4. Multinational corporations—businesses with vast holdings in many countries such as Disney, CocaCola, and Microsoft—dominate the world’s economy.
B. A look at Wal-Mart illustrates two key points.
1. The government’s long arm of regulation affects Wal-Mart, as it does the hundreds and thousands of
other U.S. companies.
2. Wal-Mart epitomizes the imbedding of the U.S. economy in the global economy, a trend that will
continue to have an enormous impact on the domestic economy and the politics of economic policy.
C. Studies by political scientists have reaffirmed Harry S. Truman’s observations about voters and their
pocketbooks.
1. Policymakers worry constantly about the state of the economy, and voters often judge officeholders
by how well the economy performs.
2. Traditionally in American politics, Democrats stress the importance of employment while
Republicans are worried about inflation. This reflects their constituencies.
D. Measuring how many and what types of workers are unemployed is one of the major jobs of the Bureau of
Labor Statistics (BLS) in the Department of Labor.
1. No one questions using a survey to determine the unemployment rate, but some economists do
challenge the BLS’s definition of this rate (the proportion of the labor force actively seeking work but
unable to find a job).
E. The problem of inflation is the other half of policymakers’ regular economic concern.
1. The Consumer Price Index (CPI) is the key measure of inflation.
2. Few things are more worrisome to consumers and politicians alike than the combined effects of
inflation and unemployment marching upward together, referred to by Jimmy Carter as the “misery
index.”
II. POLICIES FOR CONTROLLING THE ECONOMY
A. The impact of government on the economic system is substantial, but it is also sharply limited by a basic
commitment to a free enterprise system.
1. When the stock market crash of 1929 sent unemployment soaring, President Herbert Hoover clung
to the laissez-faire principle that government should not meddle with the economy.
2. In the next presidential election, Hoover was handily defeated by Franklin D. Roosevelt, whose New
Deal experimented with dozens of new federal policies to put the economy back on track.
3. Government has been actively involved in steering the economy since the Great Depression and the
New Deal.
4. The American political economy uses two important tools to guide the economy—monetary policy
and fiscal policy.
B. Monetary policy and the Fed.
1. Monetary policy involves the manipulation of the supply of money and credit in private hands.
a. An economic theory called monetarism holds that the supply of money is the key to the nation’s
economic health.
b. Monetarists believe that having too much cash and credit in circulation generates inflation.
2. The main agency for making monetary policy is the Board of Governors of the Federal Reserve
System (otherwise known as “the Fed”).
a. Created by Congress in 1913 to regulate the lending practices of banks and thus the money supply, the
Federal Reserve System is intended to be formally beyond the control of either the president or
Congress.
b. Its seven-member Board of Governors is appointed by the president (and confirmed by the Senate) for
14-year terms—a length of the time designed to insulate them from political pressures; the general
finding is that the Fed actually is responsive to the White House, but at times the chief executive can be
left frustrated by the politically insulated decisions of the Fed.
3. The Fed sets discount rates for the money that banks borrow from the Federal Reserve banks; by
raising or lowering the rate that banks pay, these increased (or decreased) costs will be passed on to
people who take out loans, and thus affect the amount of money in circulation.
a. The Fed can also exercise control over the money supply by buying and selling government securities
in the market (open market operations), thereby either expanding or contracting the money supply.
C. Fiscal policy: Keynesian versus supply-side economics.
1. Fiscal policy describes the impact of the federal budget—taxing, spending, and borrowing—on the
economy.
2. Fiscal policy is shaped mostly by the Congress and the president.
3. Whether bigger government or smaller government best ensures a strong economy has become the
central issue in economic policymaking.
4. On the side of big government, Democrats lean more toward Keynesian economic theory, which
holds that government must stimulate greater demand, when necessary, with bigger government (such as
federal job programs).
5. Many Republicans advocate supply-side economics, which calls for smaller government (such as tax
cuts) to increase the incentive to produce more goods.
a. Rather than public works programs to stimulate demand, Americans received tax cuts under President
Reagan and President George W. Bush to stimulate supply.
III. WHY IT IS HARD TO CONTROL THE ECONOMY
A. Some scholars argue that politicians manipulate the economy for short-run advantage to win elections;
however, no one has shown that decisions to influence the economy at election time have been made on a
regular basis.
B. “Managing” the economy is more difficult than many politicians (and citizens) believe.
1. Politicians—and even economists—do not understand the workings of the economy sufficiently well
to always choose the correct adjustments to ensure prosperity.
2. Most policies must be decided upon a year or more before their full impact will be felt on the
economy.
3. The American capitalist system presents a restraint on controlling the economy: because the private
sector is much larger than the public sector, it dominates the economy.
4. The increasingly interdependent world activities of other nations can interfere with the American
government’s economic plans.
5. Fiscal policy is hindered by the budgetary process: most of the budget expenditures for any given
year are “uncontrollable.”
6. Economic policy in the United States is decentralized: the president and Congress may not agree on
taxes or spending, and neither may agree with the Fed.
IV. ARENAS OF ECONOMIC POLICYMAKING
A. Economic interests far outnumber any other kind of interest groups.
1. Liberal or conservative, most interest groups seek benefits, protection from unemployment, tax
breaks, or safeguards against some other economic evil.
2. Business, consumers, and labor are three of the major actors in, and objects of, government economic
policy.
B. Americans have always been suspicious of concentrated power, whether in the hands of government or
business. In both the old economy and the new, government policy has tried to control excess power in the
corporate world.
1. Corruption and concentration of economic power are two major concerns of government regulation.
a. The corruption scandals of the twenty-first century followed a binge of corporate concentration in the
last century.
b. Corporate giants have also internationalized in the postwar period. Some multinational corporations,
businesses with vast holdings in many countries, have annual budgets exceeding that of many foreign
governments.
c. Since the early 1980s, a new form of entrepreneurship has flourished, merger mania.
2. The purpose of antitrust policy is to ensure competition and prevent monopoly (control of a market
by one company).
a. Government regulation of business is at least as old at the Sherman Antitrust Act of 1890.
3. Although business owners and managers complain about regulation, the government also sometimes
comes to the aid of struggling businesses.
4. The main regulatory agency responsible for regulation of business practices is the Securities and
Exchange Commission (SEC).
C. Consumer policy.
1. The first major consumer protection policy in the United States was the Food and Drug Act of 1906,
which prohibited the interstate transportation of dangerous or impure food and drugs.
2. Today the Food and Drug Administration (FDA) has broad regulatory powers over the
manufacturing, contents, marketing, and labeling of food and drugs.
a. It is the FDA’s responsibility to ascertain the safety and effectiveness of new drugs before approving
them for marketing in America.
3. “Consumerism” was awakened in the 1960s by consumer activists such as Ralph Nader, who argued
that it was the government’s responsibility to be a watchdog on behalf of the consumer.
a. The Consumer Product Safety Commission (CPSC) has broad powers to ban hazardous products
from the market.
4. The Federal Trade Commission (FTC)—which has traditionally been responsible for regulating
trade practices—also jumped into the business of consumer protection in the 1960s and 1970s; Congress
also made the FTC the administrator of the new Consumer Credit Protection Act (which enforces
“truth in lending”).
D. Labor and government.
1. Until the Clayton Antitrust Act of 1914 exempted unions from antitrust laws, the federal
government spent more time busting unions than trusts.
2. The major turning point in government policy toward labor took place during the New Deal.
a. In 1935, Congress passed the National Labor Relations Act (often called the Wagner Act), which
guaranteed workers the right of collective bargaining—the right to have labor union representatives
negotiate with management to determine working conditions—and set rules to protect unions and
organizers.
b. The Taft-Hartley Act of 1947 continued to guarantee unions the right of collective bargaining, but
also prohibited various unfair practices by unions.
(1) The law permitted states to adopt what union opponents call right-to-work laws—laws that forbid
labor contracts from requiring workers to join unions in order to hold their jobs.
3. Unions have had two notable successes.
a. Partly as the result of successful union lobbying, the government provides unemployment
compensation.
b. Since the era of the New Deal, government has guaranteed a minimum wage for hourly employees.
V. UNDERSTANDING ECONOMIC POLICYMAKING
A. In America, solutions to many of the problems of a free enterprise economy were achieved through the
democratic process.
B. It would be an exaggeration to say that democracy regularly facilitates an economic policy that looks after
general rather than specific interests.
1. One of the consequences of democracy for economic policymaking is that groups that may be
adversely affected by an economic policy have many avenues through which they can work to block it.
2. The decentralized American political system often works against efficiency in government.
C. Economic policymaking and the scope of government.
1. Liberals and conservatives disagree about the scope of government involvement in the economy.
2. Liberals focus on the imperfections of the market and what government can do about them;
conservatives focus on the imperfections of government.
3. The two parties have different economic policies, particularly with respect to unemployment and
inflation; Democrats try to curb unemployment more than Republicans, though they risk inflation in so
doing, and Republicans are generally more concerned with controlling inflation.
KEY TERMS AND CONCEPTS
Antitrust policy: government regulation of business to ensure competition and prevent monopoly (control of a
market by one company).
Capitalism: an economic system in which individuals and corporations own the principal means of production,
through which they seek to reap profits.
Collective bargaining: the right of workers to have labor union representatives negotiate with management to
determine working conditions.
Consumer Price Index (CPI): a government statistic that measures the change in the cost of buying a fixed
basket of goods and services.
Federal Reserve System: created by Congress in 1913 to regulate the lending practices of banks and thus the
money supply.
Fiscal policy: the government’s decisions to tax, spend, and borrow, as reflected in the federal budget.
Food and Drug Administration (FDA): government agency with broad regulatory powers over the
manufacturing, contents, marketing and labeling of food and drugs.
Inflation: a government statistic that measures increases in the price of goods.
Keynesian economic theory: the theory emphasizing that government spending and deficits can help the
economy weather its normal ups and downs. Proponents of this theory advocate using the power of government
to stimulate the economy when it is lagging.
Laissez-faire: a belief that government should not intervene in the economy.
Mixed economy: a system in which the government, while not commanding the economy, is still deeply
involved in economic decisions.
Monetarism: economic theory that suggests that the supply of money is key to the nation’s economic health.
Monetary policy: government decisions regarding the money supply, including the discount rates for bank
borrowing, reserve requirements for banks, and trading of government securities.
Multinational Corporation: businesses with vast holdings in many countries.
National Labor Relations Act: passed by Congress in 1935, guarantees workers the right of collective
bargaining; also known as the Wagner Act.
Protectionism: the economic policy of shielding an economy from exports.
Right-to-work laws: laws forbidding labor contracts from requiring workers to join unions to hold their jobs.
Securities and Exchange Commission: the federal agency created during the New Deal that regulates stock
fraud.
Supply-side economics: economic philosophy that holds that the key task for government economic policy is to
stimulate the supply of goods, not their demand.
Unemployment rate: a government statistic that measures how many workers are actively seeking work but
unable to find jobs.