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ECONOMIC POLICY
Government, Politics and the
Economy
 Capitalism
 Individuals and corporations own the principal
means of production and seek profits.
 Mixed Economy
 Government is deeply involved in economic
decisions as regulator, consumer, subsidizer,
taxer, employer, and borrower.
Government, Politics and the
Economy
 Multinational Corporations
 Businesses with vast holdings in many
countries.
 Products flow between regions and jobs move
to regions where they can be performed more
cheaply
Government, Politics and the
Economy
 “It’s the Economy, Stupid”: Voters,
Politicians, and Economic Policy
 Economic conditions are the best single
predictors of voters’ evaluation of the
president.
 Democrats stress the importance of
employment, and Republicans stress
importance of inflation.
Government, Politics and the
Economy
 Unemployment and
Inflation
 Unemployment rate –
Proportion of the labor
force seeking work but
unable to find jobs.
 125,000 new monthly
needed just to keep up
with new entrants into the
labor force.
 10% unemployment rate
in late 2009 with economic
recession.
Government, Politics and the
Economy
 Unemployment and
Inflation (cont.)
 Underemployment rate –
Statistic that includes the
unemployed, discouraged
workers, and people who
are working part-time that
cannot find full-time work.
 In July 2010, the national
unemployment rate was
9.5% and
underemployment rate
was 16.5%.
Government, Politics and the
Economy
 Unemployment and
Inflation (cont.)
 Inflation – A rise in price
of goods and services.
 Consumer price index –
Change in the cost of
buying a fixed basket of
goods and services.
 The annual inflation rate
in the United States has
consistently been below
4%.
Policies for Controlling the
Economy
 Laissez-Faire
 Principle that government
should not meddle in the
economy.
 The 1929 stock market
crash sent unemployment
soaring, but Hoover clung
to laissez-faire.
 Roosevelt’s New Deal
involved the government
in the economy during the
Great Depression.
Policies for Controlling the
Economy
 Monetary Policy and
the “Fed”
 Monetary policy – Affects
supply of money in private
hands.
 Monetarism – Too much
cash and credit in
circulation producing
inflation.
 Federal Reserve System –
Makes monetary policy
and regulates the lending
practices of banks.
http://www.youtube.com/watch?v=d0nERTFo-Sk
Policies for Controlling the
Economy
 Monetary Policy and
the “Fed” (cont.)
 Federal funds rate – What
banks can charge each
other for loans.
 Fed buys and sells
government bonds to
determine amount of
money banks have to lend
out.
 Borrowing is cheaper
when banks have more
money and expensive
when they have less
money.
Policies for Controlling the
Economy
 Fiscal Policy: Keynesian
Versus Supply-Side
Economics
 Fiscal policy – Use of
federal budget to influence
economy and is almost
entirely determined by
Congress and the
president.
 Keynesian economic
theory – That government
spending and deficits can
help the economy deal
with its ups and downs.
Policies for Controlling the
Economy
 Fiscal Policy: Keynesian
Versus Supply-Side
Economics
 Supply-side economics –
Cutting tax rates will
stimulate the supply of
goods.
 Supply-siders – Lower tax
rates stimulate supply of
goods, as people are
motivated to work longer,
increase savings and
investments, and produce
more.
Policies for Controlling the
Economy
 Why It Is Hard to
Control the Economy
 Most policies must be
decided a year or more
before their full impact will
be felt on economy.
 Budgetary process is
dominated by
uncontrollable
expenditures mandated by
law, and many benefits
automatically increase
with the cost of living.
Policies for Controlling the
Economy
 Why It Is Hard to
Control the Economy
 Capitalist system make it
hard to control the
economy because the
private sector is much
larger than the public
sector.
 Federal government
spends about 30% of GDP,
but consumers and
businesses make the
majority of our economic
decisions.