Download Economic Policymaking: Chapter 17Chapter Summary

Economic Policymaking: Chapter 17
Chapter Summary
I. Government and the Economy (542-545)
A. Introduction
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. America has a mixed economy—a system in
which the government, while not commanding the economy, is still deeply
involved in economic decisions.
B. Unemployment and Inflation
Economic problems create social problems. Unemployment and inflation
especially have political and social repercussions. The unemployment rate is
the percentage of Americans actively seeking employment but unable to find
work. Inflation is the rise in prices for consumer goods. The consumer price
index (CPI) measures the change in the cost of buying a fixed basket of goods
and services. Many economists and politicians believe that methods for
calculating the CPI need to be revised in order to avoid overestimating
inflation. Few things are more worrisome to consumers and politicians alike
than the combined effects of inflation and unemployment marching upward
together.
C. Elections and the Economy
Voters pay attention to economic trends in making up their minds on election
day. Voters who experience unemployment are more likely to support
Democratic candidates. Concern over inflation has had less impact on voter
choices.
D. Political Parties and the Economy
Republicans are willing to risk higher unemployment and recession, whereas
Democrats are willing to tolerate high inflation. The Democratic coalition is
made up heavily of groups who worry the most about unemployment. The
Republican coalition rests more heavily on a base of people who are most
concerned about steady prices for their goods and services.
II. Instruments for Controlling the Economy (545-549)
A. Introduction
Especially since the Great Depression, government has been actively involved
in steering the economy. Prior to this the government pursued a laissez-faire
policy—the principle that government should not meddle with the economy.
B. Monetary Policy and the Fed
Monetary policy is the manipulation of the supply of money and credit in
private hands. Monetarism holds that the supply of money is the key to the
nation’s economic health. The main agency for making monetary policy is “the
Fed,” whose formal title is the Board of Governors of the Federal Reserve
System. The Fed uses three instruments to control the money supply. First,
they set discount rates for the money that banks borrow from the Federal
Reserve banks. Second, they set reserve requirements that determine the
amount of money that banks must keep in reserve at all times. Third, they buy
and sell government securities in the market, thereby expanding or contracting
the money supply. The amount of money available, interest rates, inflation,
and the availability of jobs are all affected by the Fed. Presidents try to
persuade the Fed to pursue policies in line with the presidential agenda.
C. Fiscal Policy: Keynesian versus Supply-Side Economics.
Fiscal policy describes the impact of the federal budget on the economy.
Keynesian economic theory envisions and activist government with a large
scope. This has been the dominant economic philosophy in American since the
Great Depression. According to Keynesian theory the government’s job is to
increase the demand when necessary and the supply would take care of itself.
President Reagan believed that the key task for government economic policy is
to stimulate the supply of goods, not their demand. Supply-side economics
argues that big government soaked up too much of the gross domestic product
by taxing too heavily, spending too freely, and regulating too tightly,
government curtailed economic growth. Supply-siders believed that cutting
taxes would pull business out of its doldrums.
III. Obstacles to Controlling the Economy (549-550)
Controlling unemployment and inflation with precision is very difficult. It is
difficult to implement programs since most policies must be decided upon a
year or more before they will have their full impact on the economy. A major
restraint on government’s ability to control the economy is the fact that the
private sector is much larger than the public sector and dominates the
economy. The budgetary process, because of the fact that much of the
budget is uncontrollable, also hinders fiscal policy.
IV. Arenas of Economic Policymaking (550-556)
A. Business and Public Policy: Subsidies Amid Regulations
The corporation has long stood at the center of the American economy. Some
transnational corporations, businesses with vast holdings in many countries,
have annual budgets exceeding that of many foreign governments. Since the
early 1980s billions have been spent by conglomerates buying out other
companies. Competition in today’s economy is often about which corporations
control access to, and profits from, the new economy. In the old and new
economy, Americans have always been suspicious of concentrated power. In
both the old and new economy, government policy has tried to control excess
power in the corporate world. Antitrust policy is designed to ensure
competition, prevent monopoly and, prevent restraints on trade. Antitrust suits
are more often threatened than carried out. In a few cases government loans
or buyouts have made government an actual partner or owner in corporate
America. The Department of Commerce serves as a veritable storehouse of
assistance for business.
B. Consumer Policy: The Rise of the Consumer Lobby
Years ago public policy ignored consumers and their interests. Today, the Food
and Drug Administration (FDA) has broad regulatory powers over the
manufacturing, contents, marketing, and labeling of food and drugs although
funding cuts have left it overburdened and understaffed. Consumerism rose in
the 1960s under the leadership of activists such as Ralph Nader. The Federal
Trade Commission (FTC), traditionally responsible for regulating trade
practices, became involved in consumer protection as a defender of consumer
interests in truth in advertising.
C. Labor and Government
Perhaps the biggest change in economic policymaking has been the about-face
turn in public policy toward labor unions over the past century. The major
turnabout in policy toward labor took place during the New Deal. The National
Labor Relations Act (1935) guaranteed workers the right of collective
bargaining. The Taft-Hartley Act of 1947 continued to guarantee unions the
right of collective bargaining, but also prohibited unfair practices by unions.
One section of the law allows states to adopt right-to-work laws that forbid
labor contracts from requiring workers to join unions to hold their jobs. Partly
as a result of successful union lobbying, the government provides
unemployment compensation and guarantees a minimum wage.
D. New Economy, New Policy Arenas
The last few decades have seen a shift in focus from the old industrial
economy to a new information economy. Three million Americans work in
technology-producing industries. Access to technology is uneven. The old
economy generated issues of income inequality, but the new economy involves
issues of information equality. The racial and ethnic gaps in information access
are widening.
V. Understanding Economic Policymaking (556-558)
A. Democracy and Economic Policymaking
Through the ballot box, Americans essentially decided to give up certain
economic freedoms for the good of society as a whole. The decentralized
American political system often works against efficiency in government. One of
the consequences of democracy for economic policymaking is that it is difficult
to make decisions that hurt particular groups or that involves short-term pain
for long-term gain.
B. Economic Policymaking and the Scope of Government
Liberals and conservatives disagree most about the scope of government
involvement in the economy. Liberals favor an expanded role of government in
stimulating the economy during times of recession. Conservatives argue
against government intervention. Whereas liberals focus on the imperfections
of the market and what government can do about them, conservatives focus
on the imperfections of government.
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