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Chapter 16:
Economic Policy
American Democracy Now, 3/e
Economic Health and the
American Dream
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Many U.S. citizens desire a healthy economy so
that they can achieve the American dream —a
financially secure, happy, and healthy life, with
upward social mobility, attained through an
individual’s hard work and persistence.
For most individuals the ability to earn enough
money to attain the American dream is the
product of several factors, including their
education level, their work ethic, and the
availability of well-paying jobs.
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Economic Health and the
American Dream
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Personal income is positively correlated with
educational attainment.
Race and sex are also correlated with personal
income.
Although achieving the American dream
depends on individual attributes and
opportunities to develop those attributes, the
health of the national economy also plays a
major role.
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The American Economy
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The U.S. economy is not an example of pure
capitalist economy.
A pure capitalist economy has government-free
marketplace.
Because of the many national policies enacted
to influence the economy, the U.S. economy is
an example of a regulated capitalist economy
(mixed economy).
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Economic Theories That Shape
Economic Policy
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Initial public support for laissez-faire economic
policy.
Over time, as the national economy evolved and
experienced ups and downs, economists
developed new theories about the proper role for
governments in creating and maintaining a
healthy economy: Keynesian economics, supplyside economics, and monetarism.
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Laissez-Faire Economics: An
Unrealized Policy
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Until the late 1800s, a majority of the American people
believed that the national government should take a
relatively laissez-faire, or “hands-off,” stance with regard
to the marketplace.
Adam Smith, Wealth of Nations (1776).
However, the national government never fully
implemented laissez-faire.
As the national economy grew with industrialization,
Americans accepted and even called for a mixed
economy featuring regulated capitalism.
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Keynesian Economics
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Before the Great Depression of the 1930s, government
officials and economists believed that a balanced
budget.
Keynesian economics recommends that during a
recession the national government should increase its
spending (to create jobs) and decrease taxes (so that
people have more money to spend) to stimulate the
economy.
During times of rapid economic growth—an economic
boom—Keynesian theory recommends cutting
government spending and possibly increasing taxes.
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Keynesian Economics
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Keynesian economic theory advocates using
fiscal policy, the combination of tax policy and
spending policy, to ensure a healthy economy.
Fiscal policies of George W Bush and Barack
Obama.
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Supply-Side Economics
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President Reagan introduced the nation to a
competing economic theory, supply-side
economics, which advocates tax cuts and a
decrease in government regulation to stimulate
the economy in times of recession.
Supply-siders argue that the government
collects so much money in income taxes from
workers that they are discouraged from working
more than they absolutely need to.
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Supply-Side Economics
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High taxes drain the economy because they
diminish people’s ability to save and
corporations’ ability to invest to increase
productivity.
Support for deregulation— reducing or
eliminating restrictions on business— to
increase supply of goods.
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Monetarism
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Monetarism advocates that the government’s
proper role in promoting a healthy economy is
the regulation of the money supply to ensure
that the rate of inflation remains low.
Inflation refers to a rising price level for
consumer goods, which decreases the
purchasing power of money.
Monetarists target an inflation rate of 1–3
percent per year to ensure an adequate money
supply for a healthy economy.
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Should One Economic Theory
Predominate?
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There is perpetual debate over how involved the
government should be in the economy and what
specific policy actions it should take.
Each theory supports the use of different
government policies to promote a healthy
economy.
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Measuring Economic Health
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Economists and government officials describe a
healthy economy as one that has these
characteristics: expanding gross domestic
product (GDP); low unemployment rate; low
inflation rate.
Other measures of economic health focus on the
general well-being of the people by accounting
for factors such as rates of poverty and literacy
and the financial situation of households.
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Traditional Measures of Economic
Health
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Gross domestic product (GDP) is the total
market value of all goods and services produced
within a country’s borders.
The consumer price index (CPI) measures the
average change in prices over time of a “market
basket” of goods and services, including food,
clothing, shelter, fuel, transportation costs, and
selected medical costs.
A low unemployment rate, 5 percent or less, is
also characteristic of a healthy economy.
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Other Measures of Economic Health
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The United Nations (UN) created the Human
Development Index (HDI) to measure the
standard of living of the people of various
nations.
The HDI assesses three components of human
development that people in prosperous nations
should be able to enjoy: a long and healthy life,
educational opportunities, and a decent
standard of daily living.
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Other Measures of Economic Health
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Median household income is the income level
in the middle of all household income.
Income inequality is calculated by measuring
changes in the percentage of the total income
held by each quintile of American households
The poverty rate is the percentage of the
population with income below the nationally
designated poverty level.
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Fiscal Policy and Economic Health
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National government expenditures accounted for
24 percent of the GDP of the United States in
2011.
Although government spending certainly can
create jobs, its primary goal is to provide the
services necessary to fulfill the Constitution’s
mission.
The other side of the coin, tax policy, raises
revenue needed by the national government to
serve the people.
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Tax Policy
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Today, the national tax on individual income is
the largest revenue source for the national
government.
The second-largest revenue category, social
insurance, includes taxes collected for Social
Security and Medicare.
The national government also collects excise
taxes, which are taxes levied against a specific
item such as gasoline or liquor, estate and gift
taxes, and customs duties (import taxes).
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Tax Policy
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The national income tax is a progressive tax because it
takes a larger percentage of the income of wealthier
taxpayers and a smaller percentage of the income of
less-well-off taxpayers.
A proportional tax (flat tax) takes the same percentage
of each taxpayer’s income.
A regressive tax takes a greater percentage of the
income of lower-income earners than of higher-income
earners.
Taxes may affect various taxpayers differently because
the government grants tax expenditures.
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Spending Policy
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Programs granted budget authority through
annual appropriation acts are discretionary
spending programs.
The largest share of the national budget pays for
mandatory spending , which includes
programs whose budget authority is provided in
laws other than annual appropriation acts.
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Creating Fiscal Policy Through the
National Budget Process
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The President’s Executive Budget
Congressional Action
 The concurrent budget resolution.
 Budget reconciliation.
 Continuing resolution.
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Deficit Spending, Debt, and Economic
Health
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Deficit spending has become the norm.
The long-term impact of debt is the legal
obligation to pay back not only the money
initially borrowed (the principal ) but also
interest, an additional amount of money equal to
a percentage of the amount initially borrowed.
Future generations must pay back the debt of
their parents and grandparents.
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Economic Policy
Where Do You Stand?
Is your personal standard of living better or worse today
than it was five years ago, or is it about the same?
a. Better
b. Worse
c. The same
d. No opinion
Source: “Four in 10 Americans See Their Standard of Living Declining,”
www.gallup.com/poll/107749/Four-Americans-See-Their-Standard-LivingDeclining.aspx.
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Monetary Policy and the Federal
Reserve System
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The Fed
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Board of Governors
Twelve Federal Reserve Banks
Federal Open Market Committee (FOMC)
Today, the Fed’s responsibilities include
1.
2.
3.
4.
setting monetary policy
supervising and regulating banking institutions;
maintaining the stability of financial markets;
providing financial services to depository institutions, the
national government, and foreign official institutions
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Monetary policy
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The Fed can raise or lower the reserve
requirement —the amount of money that
financial institutions must keep out of circulation.
It can also raise or lower the discount rate —the
interest charged to financial institutions that
borrow money from the Federal Reserve bank.
The Fed action that most influences the money
supply is its decision to buy or sell Treasury
Securities.
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Economic Policy
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Regulatory Policy
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Business Regulation
Social Regulation
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Early Social Regulation
Consumer and Environmental Protection
The Costs of Regulation
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Regulatory Policy
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Business regulation includes government
policies that aim to preserve competition in the
marketplace.
Social regulation refers to government policies
directed at protecting workers, consumers, and
the environment from the harm caused by
marketplace competition.
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Early Social Regulation
Consumer and Environmental Protection
The Costs of Regulation
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Economic Policy
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Trade Policy in the Global Economy
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Trade Policy: Protectionist or Free Trade?
International Trade Agreements
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Trade Policy in the Global Economy
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To navigate in the global economy, each nation
has its own trade policy —a collection of tax
laws and regulations that support the country’s
international commerce.
The goal of trade policy is ostensibly to promote
prosperous economies.
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Trade Policy: Protectionist or Free
Trade?
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Protectionist trade policy aims at protecting
domestic producers and businesses from foreign
competition through tariff s and nontariff trade
barriers.
A tariff is a special tax on imported goods
Nontariff trade barriers include government
social and business regulations as well as
government subsidies.
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Trade Policy: Protectionist or Free
Trade?
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After World War II, the United States and its
international partners gradually shifted toward a
free trade policy, which aims at lowering or
eliminating tariffs and nontariff barriers to trade.
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International Trade
Agreements
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The 1947 General Agreement on Tariff s and
Trade (GATT).
In 1995, the World Trade Organization (WTO)
came into being.
The 1993 North American Free Trade
Agreement (NAFTA).
Growing public concerns about possible damage
to living standards and the health of the global
environment.
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Economic Policy
Where Do You Stand?
Do you view foreign trade as a positive
opportunity for U.S. businesses or as a threat
to the U.S. economy?
a. Positive opportunity
b. Threat to economy
Source: “More Americans See Threat, Not Opportunity, in Foreign Trade,”
www.gallup.com/poll/17605/More-Americans-See-Threat-Opportunity-ForeignTrade.aspx.
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Economic Policy
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The U.S. Economy, the Global Economy,
and the American Dream Today
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A healthy economy with growing income
inequality
The elusive American dream
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The U.S. Economy, the Global Economy,
and the American Dream Today
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Is the American dream doing better
economically than your parents?
Is it being rich?
Is it living in a nation that has a stable, healthy
economy and an equal opportunity to achieve
(measured by home ownership, high levels of
education, and comfortable retirement)
according to your ability and effort?
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The U.S. Economy, the Global Economy,
and the American Dream Today
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Can government policies ensure a healthy
national economy in today’s interdependent
global economy?
Can government domestic policies ensure equal
opportunity for citizens to achieve according to
their ability and effort?
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Economic Policy
Where Do You Stand?
In your opinion, what is the United States’ most serious
economic problem today?
a.
Prices of gas and oil
b.
Cost of housing/mortgages
c.
Unemployment/jobs
d.
Personal finances
e.
Government spending on the war and
defense
f.
Other
Source: “Americans’ Views of the Economy and the State of the Country,”
www.cbsnews.com/htdocs/pdf/Mar08c-economy.pdf.
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